How the midterms will shape defense spending; Lockheed gets F-35 upgrade deal; AIA kills media luncheon; and more.

Now that the Democrats have won the House (and Republicans gained seats in the Senate), the experts are trying to figure out what the election means for defense spending. The predictions vary, but there are some areas of general agreement.

The Trump administration had already been planning for relatively flat national-security spending, and more recently, a slightly decline beginning in 2020. This follows two years of major spending increases that the Pentagon has used to improve the readiness of troops, buy new gear, and start developing the weapons of the future.

“We do not see midterm election results being overly negative for the outlook for defense spending,” writes Cowen & Company’s Roman Schweizer. “They could, in fact, be positive if a bipartisan spending deal is reached that increases defense & nondefense spending.”

That’s a big if. One thing is certain, a budget fight’s a-brewin’. This year, Congress managed to pass both the defense spending and policy bills on time. Don’t expect that again: federal spending budget caps still loom over the 2020 and 2021 budgets.

“The outcome suggests a protracted battle will be waged over the FY20 DoD budget, though we believe it’s improbable that Congress would fail to find an eventual compromise and sequestration occur in [January] 2020 under the Budget Control Act. There will be a deal to avoid that outcome,” writes Byron Callan of Capital Alpha Partners.

Avascent’s Matt Vallone writes: “It’s too early to tell whether this new arrangement will be better or worse for spending, but it certainly promises to make the budget process for FY 2020 more difficult to predict.”

Another question: what pays the bills if and when defense spending is cut.

“Modernization and expansion of the U.S. military is not going to progress at the pace that defense hawks had hoped,” defense analyst and consultant Loren Thompson writes in Forbes.

Analysts have been quick to point out new nuclear weapons, expected to collectively cost hundreds of billions of dollars over the coming decades, could be a target. Here are the top-four nuclear efforts.

  • Ground Based Strategic Deterrent. Boeing and Northrop Grumman are under contract competing to build this successor to the Minuteman III intercontinental ballistic missile).
  • Long-Range Standoff weapon, which Lockheed Martin and Raytheon are competing to build.
  • Northrop Grumman is building the new B-21 stealth bomber, which will carry conventional and nuclear weapons.
  • General Dynamics Electric Boat and Huntington Ingalls Newport News Shipbuilding are building new Columbia-class ballistic missile submarines to replace the Ohio class.

Some other areas where we could see fights:

  • Could ambitious missile defense aspirations become a bill payer? We still haven’t seen the much anticipated (and finished for months now) Missile Defense Review.
  • How President Trump’s calls for a Space Force? Democrats could scale back that effort from a new branch of the military, to a corps within the Air Force to leaving things exactly as they are today.

But the consensus seems to indicate that while there will be a budget fight, past experience shows us that defense seems to end up in a decent place when deals are hammered out. Perhaps Schweizer sums it up best: “We do not expect defense spending to experience the rate of growth it did in FY18-19 nor do we believe it will decline substantially.”


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Spotlight on the Revolving Door

The Project on Government Oversight has created a database of former Pentagon officials who now work in the defense industry. “Of the DoD officials POGO tracked through the revolving door, within two years of leaving the Department a quarter of them (95) went to work at the DoD’s top 5 contractors: Lockheed Martin, Boeing, Raytheon, General Dynamics, and Northrop Grumman.” More here.

A Look Into The Pentagon’s Supply Chain

With the Trump administration’s increased focus on the Pentagon’s supply chain, there’s a new report of note from analytics firm Govini about how the Defense Department is modernizing its supply chain technology. Some key takeaways:

  • The Pentagon spent nearly $80 billion on supply chain technology between 2014 and 2017.
  • “The majority of contracting dollars are going toward sustaining Legacy IT systems.”
  • New tech, including artificial intelligence, Internet of Things and the cloud “are revolutionizing DoD’s supply chain approach.”

JP Morgan Downgrades L3

The move comes less than a month after L3 Technologies and Harris announced plans to merge next year. JP Morgan downgraded L3 from “Overweight” to “Neutral.”

Lockheed Gets F-35 Modernization Deal

The $130 million contract, awarded on Nov. 2, is part of an effort to update the fighter jet’s software and increase the types of weapons it could carry.

The ‘Defense Prom’ is Dead

The annual Aerospace Industries Association luncheon — for years widely attended by hacks and flacks is officially no more. It will be replaced by two separate events: 1) An after-work social event for reporters and communications professionals and 2) likely a briefing with AIA CEO Eric Fanning to coincide with the Pentagon’s annual budget release early next year.

“We have decided to retire AIA’s legendary annual media luncheon ahead of AIA’s Centennial next year,” Caitlin Hayden, the group’s vice president of communications said in an email. “Our members and journalists told us that they really valued the opportunity to network with each other in a social setting, but would prefer a less formal event in the evening.”

Typically held in December, the event was a get-together for communications executives from large and medium-sized defense firms and defense and aerospace journalists. It started with a cocktail hour (at 11:30 a.m. on a weekday) followed by a luncheon where the organization would give an award to a communications executive or reporter and the AIA CEO would give a “state of the industry” presentation. In recent years, a press conference with AIA’s CEO would follow that.

Months before each luncheon, AIA held a reporter “draft” in which the defense companies selected reporters to sit at their table, akin to how sports leagues draft players. Sources say there were multiple rounds; larger companies like Lockheed Martin and Boeing got the most picks because they had multiple tables at the event.

Each company had a different approach to the luncheon. For most, there was little overt pitching of stories; it was a more social, “get to know you” type of event. Others would go into hard-pitch mode, complete with printed-out PowerPoint presentations waiting on each reporters’ plate.

Two years ago, I was seated at a Boeing table. When I arrived in the banquet hall, there were reporters at the table, but only one rep from the company. Why? An hour earlier, then-President-elect Trump tweeted about Air Force One meaning. That kept the two or three other flacks back at the company’s Arlington, Virginia, offices responding to reporters’ emails and phone calls.

My take: I’ve always found the luncheon bizarre — as current and former colleagues who have shared a taxi with me to the event can attest. The cocktail hour was the most valuable part: a good opportunity to network. The luncheon, not as much. As one industry source recently told me, the whole lunch part always felt forced.

Making Moves

Leonardo DRS, the U.S. arm of the Italian defense firm, appointment John Baylouny, executive vice president and chief operating officer. Baylouny — who was previously the Chief Technology Officer — replaces Terry Murphy who is retiring at the end of the year.